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Bubble or bust? Nobody knows anything

“Nobody knows anything” – screenwriter William Goldman, on the film industry

Sequoia Capital is widely (and, in my opinion, correctly) considered to be the best venture capital firm on the planet. Their list of hits include Apple, Oracle, Cisco, Atari, EA, Google, Yahoo, and Paypal (and that’s just counting the investments of two of their partners – Don Valentine and Mike Moritz).

While acknowledging that the economy always goes in boom-bust cycles (to which VC investments are especially susceptible):

Sequoia said this downturn would be different:

They didn’t include numbers on the X axis but since average recessions take about 2 years from which to recover, the implication was this recovery would take much longer:

And that the tech sector in particular would suffer:

Their advice for VC-backed firms was to cut spending quickly and assume that VC markets will be effectively closed for a long time:

Flash forward to 2010, Sequioa just led a rumored $25M-$30M funding round in Tumblr at a valuation of approximately $150M. Tumblr has great user growth but reportedly little or no revenues. Very smart people like Fred Wilson seem to think a VC bubble is looming. The good times appear to be back.

I say this not to criticize Sequoia – they are the smartest investors around – but just to point out that even the smartest investors have no idea what lies ahead. The only way I know to function in a world of so much uncertainty is to focus on fundamentals – great people and long term trends.

13 thoughts on “Bubble or bust? Nobody knows anything”

let’s see..if I was a VC and saw an opportunity to seize a larger stake in my investments at a lower valuation due to market fears, I might try to drum up those fears to get the portfolio companies to accept it..What.. too Machiavellian?

Sequoia was right in identifying that the downturn is bigger this time. However their conclusion that speculation and investment in startup ventures would be reduced is where they were/are wrong. The reason is because now that all stock market investors now feel Wall St is corrupt and can’t be trusted there is an ocean of money invested in highly conservative vehicles that is quivering with a desire to produce bigger upside.Now that the worst fears of depression are gone that money is feeling the osmotic pull from the still risky world of startup investing. Startups are still high risk but they are also high reward. Also now with the boom in cloud based solutions the money needed to get to first revenue, and if an idea has a viable business model, is much smaller than in the past.It’s still risky but if you do some pretty straightforward homework you can be pretty sure you won’t get “Maddoffed” or “Goldman-ed”.Even very small investors can get into venture investing now as they can pool money via the Self-directed IRA tax free vehicle and use languishing IRA money to invest $10k to $50k in a startup that maybe needs only $200k and 12 months work to deliver first revenue. I’ve personally raised that amout via SD iRA the past 2 years.So the next two years may be one of the largest and most broadbased entrepreneurial funding environments in decades.And it won’t just be a ruling class of pro venture investors reaping the benefits of a more frictionless and cheaper path to venture successes.Lots of baby boomers are accredited now and have piles of money getting crap returns from the stock market, if they were wise through this crash and recovery that is. “Angel Investor” is now a rapidly growing class of investor that is disrupting the traditional angel and early stage/series A VC.Series B/C/D may now be limited only to high capital cost ventures such as biotech.So what’s coming is big but won’t be a traditional VC bubble. It will be much more “wild west” free for all with new investor “gunslingers” in every saloon ready to light up the “town sherrifs”(VCs) with a lot of hot lead”(seed money).Should be fun I think.Roger

Yeah. you have to watch out for the motives of the messenger. A lot of the current bubble theorist are also people who want lower valuations.Something to think about. The market usually fluxuates around rationality with periods of irrationaltiy. Problem is you can only be certain in retrospect.http://tech.rawsignal.com/

I think you’re reading the wrong message here Chris, the “Powerpoint of Doom” presentation correctly reads the pickle the world economy has got itself into and the conclusion that when faced with a downturn entrepreneurs and managers have to cut fast and hard to avoid the death spiral.Where the conclusion was wrong – that the days of major fundraising is over – I suspect is a temporary effect of hot money sloshing out of the massive bucket stimulus and QE money that various governments have pumped into the world economy.The good times may be back for VCs right now, but the presentation’s conclusion that a recovery in the broader economy will be long and slow appears valid.

it seems like much of the froth in VC is for social networking companies who offer their services for free, which people in this economy snatch up and drive growth. But the revenue model for social networking and many other web services is advertising, and if the majority of the advertising is for a product that people actually pay money for(since we are still in a long recession), but no-one is buying it..at what point does advertising buys slow /stop/retract? Is there is an online advertising bubble that is behind a lot of the startup growth ?

hard to predict the future, but the end of the world seems to have been averted. with that in place, there is now zero interest rates, lots of cash on the sidelines, and a lot of startups with interesting ideas.viva la bubble